Though official numbers from the All Pakistan Cement Manufacturers Association (APCMA) are not publicly available yet, provisional numbers published by brokerage firms are revealing that the sector is in for a dismal FY19. In 9MFY19, local dispatches have fallen by 7 percent year on year, with exports cushioning the blow to volumetric sales with a growth of 49 percent. These are mostly driven by sea borne exports that have grown by nearly 200 percent in 9M year on year.
As a percentage of total sales, exports have moved from 10 percent to a range of 15-16 percent each month during the fiscal year (read: “Cement’s demand flip”, March 11, 2019). Cement manufacturers have done a good job of substituting their markets and adjusting sales mix where local markets became less attractive. Particularly, in the north where demand has been especially patchy. The reasons for the slowdown have been well-documented in this column (read the latest: “Construction: Tough tidings”, March 20, 2019 and “Steel: spirits down”, March 29, 2019). The slowdown will continue as the Ramadan season comes to a close.
It is important to point out that as demand has slowed, capacities have also grown which leads to a greater struggle for players to capture a higher chunk of the market. However, capacity utilization has maintained the levels above 84 percent only because cement exports have come to the rescue. If exports had remained the same as last year, capacity utilization would have easily dropped below 80 percent. With the Indian market all but closing down, and the Afghan market opening doors for other suppliers, the northern players are suffering far more than those in the south. For north players to reach seaborne markets, the margins may be too narrow due to transportation and freight costs and the retention prices they eventually get.
There is also an increasing share of clinker in exports. A brief published by IGI securities informs that while cement exports fetch between $50-55 per ton in the international markets, clinker gets $32-35. Clearly, whatever cement manufacturers are selling abroad, it is worth a lot less than before, despite incurring the benefits from the depreciating rupee. Already, higher exports means the cement manufactures are foregoing the higher margins they get when they sell in local markets.
The outlook for cement is unexciting. Local demand is not on their side, exports are growing in the less lucrative segment, while cross borders exports are drying up. On the upside, with price increases in cement bags and stagnancy in international coal prices, manufacturers may get better margins on the domestic front, but with lower overall revenue. There aren’t any new major opportunities on the horizon for cement manufacturers for now. They will just have to ride this tide out much like the rest of the economy.
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